The Kyoto Protocol, adopted in 1997, established the foundation for the development of a carbon market with the goal of limiting and reducing GHG emissions of industrialized countries and economies in accordance with agreed targets by each member. The Kyoto Protocol laid the groundwork for Carbon Markets by establishing market-based mechanisms.
COMPULSORY CARBON MARKET (CCM)
Traded and regulated by mandatory national, regional or international regimes
VOLUNTARY CARBON MARKET (VCM)
Traded by companies and individuals on a voluntary basis to achieve carbon compensation¹ and neutralization²
Source: Mckinsey, Putting carbon markets to
work on the path to net zero
CARBON MARKETS CAN BE DIVIDED INTO TWO SEGMENTS:
COMPULSORY CARBON MARKET (CCM) AND VOLUNTARY CARBON MARKET (VCM)
Compliance (Compulsory – Cap and Trade/ ETS) Markets (CCM)
Typically, cap-and-trade emission trading system (ETS) exists, with a cap on the amount of GHG that a corporation can emit.
Companies from high-polluting industries such as energy, steel, and cement are participating in cap-and-trade schemes.
The EU Emissions Trading Scheme (EU ETS) is the largest, with a market worth $300 billion*.
A carbon allowance is a traded asset, with futures and options available on it.
A polluter who buys these credits buys the right to pollute (allowance), not the right to save CO2.
A total of 30 carbon markets are in force.
A Quarter of global emissions are covered by CO2 price (Bloomberg Nef 2021)
EMISSION TRADING SYSTEMS (ETS) GLOBAL PRICES
Source: ICAP https://icapcarbonaction.com/en/ets-map *As of 2021
Voluntary Carbon Markets (VCM)
Markets are built on the goodwill of individuals and businesses. Allows businesses and individuals to purchase carbon offsets on a voluntary basis with no intention of using them for compliance purposes.
When one carbon offset is purchased, it supports a project that has already saved one ton of CO2. Various registries track voluntary offset projects and grant offset credits for each verified and certified unit of emission reduction or elimination.
VCMs are expected to experience significant growth with the potential to reach a market value of US$5B -US$30B in 2030 (McKinsey & Company 2021)
Projections are indicative and do not guarantee and it does not imply that a profit will be achieved in the trading program in the future